Category Archives: China-U.S.

Trade Figures Bring No Cheer To Trade War

THERE IS NOT much comfort to be drawn from the latest monthly trade statistics. The 4.4% year-on-year fall in exports for December to $221.25 billion, and 7.6% decline in imports to $164.2 billion were the opposite of the increases on both sides of the ledger that had been expected. The increase in the trade balance, to $57.1 billion from $44.7 billion last month, is just the result of the arithmetic.

The trade dispute with the United States appears to be starting to bite after several months of front-loading of orders to get ahead of tariffs, but there have been plenty of straws in the wind suggesting the economy is slowing, from the first fall in annual car sales in two decades to Apple’s warnings about slumping iPhone sales.

The question is whether this will make the need to strike a trade deal with the United States by the March 1 deadline self-imposed by Presidents Xi Jinping and Donald Trump  more pressing on Beijing’s part. Or will it stiffen the resolve of the leadership to tough it out, knowing that it can only make superficial concessions unless it is willing to make structural changes that it will not?

It may also judge that a slowing global economy and jittery equity markets worldwide impose pressures of their own on the US administration, which has plenty of domestic distrctions of its own right now.

Vice Premier Liu He, Xi’s point man on the trade talks with the United States, is due in Washington before the end of the month. He might arrive with a willingness to make some big-ticket purchases to cut the headline number for the trade surplus with the United States (2018’s was the largest in a decade) and some token concessions on greater market access for US firms. Last week, the sherpas preceding his visit made some if unspecified progress on both fronts.

However, he is unlike to bring significant concessions in the contentious areas such as intellectual property and Beijing’s support for state-owned enterprises. The slowdown in China’s economy may more likely encourage Washington’s China trade hawks to believe that they need to continue to until he does.

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Deng Xiaoping’s Legacy 40 Years On

A poster showing Deng Xiaoping

IT IS NOT just the raw growth in the size of China’s economy, impressive though that has been over the 40 years since Deng Xiaoping announced the economic reforms that opened up of the country, now being celebrated with such pomp. It is China’s growing occupancy of the world economy and in particular in relation to the United States’s declining place that has coloured the past four decades and will define the ones to come.

China and United States as share of world GDP, 1978-2017

But for all the distance China’s economy has come, it still has far to go, in more senses than one.

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China-US Relations’ Twin Tracks Run Through Canada

PARAPHRASING OSCAR WILDE, to lose one citizen may be regarded as a misfortune; to lose two looks like political retaliation.

China detained two Canadian citizens following the arrest of Huawei’s chief financial officer, Meng Wanzhou, in Canada at the request of the United States, which has charged her with fraud in connections with alleged violations of US sanctions against Iran (charges the company says are baseless).

The two Canadians will be charged with undermining China’s national security.

One is a think tank researcher, and the other runs a cultural association. The work of both concerns North Korea, which would have meant they would already have been under the observation of Chinese authorities as well as making accusations of their being spies plausible.

Beijing’s fast and furious response to Meng’s arrest will reinforce perceptions in the West that Huawei and the Chinese government work hand in glove, just as in China, Meng’s arrest confirms suspicions that the West is out to kill Huawei.

US President Donald Trump has tweeted that he will intervene in Meng’s case — presumably by ordering the US Department of Justice to drop the case — if he believes it will sabotage the trade deal he is working on with President Xi Jinping. Trump has been bigging up both the scale of the deal —“the largest trade deal ever made” — and its imminence.

China’s resumption of soybean purchases from US farmers and announced the lowering of tariffs on US car imports from 40% to the 15% charged on cars imported from elsewhere suggests a deal of some sorts in the making.

It would be to Beijing’s advantage if the conflict with the United States returned to compartmentalised confrontation, rather than advance towards the so-called ‘whole government’ cold war.

But that would go against the fact that the Trump administration has been stepping up the pace of bringing US legal actions against Chinese entities and individuals for various alleged economic crimes from intellectual property violation to coerced technology transfers.

Those actions are in line with sentiment in the US Congress swinging behind the growing disenchantment in the United States, particularly among businesses, with engagement and a general strategic mistrust of China.

The uncertainties and variabilities of US policy remain; not just the Meng charges but also, for example, this week’s speech by US National Security Advisor John Bolton outlining the Trump administration’s policy towards Africa.

It was a speech remarkable for being as much if not more about China (and Russia) than it was about Africa, and a reminder that the China hawks in the Trump administration believe they are engaged in an existential struggle whereas their president is preoccupied with winning re-election in 2020.

Xi, too, has constraints. He needs to manage internal expectations as China’s economic growth slows while the economy fitfully rebalances. At the same time, the Trump administration’s stance towards China has perturbed the leadership and revived opportunity for critics of Xi’s centralisation of power.

That, more than anything, is why China-US relations will stay on two inconsistent tracks.

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‘Tariff Man’ Trump Eyes Export Controls On US AI And AV Technology

THE TARIFFS TRUCE agreed by Presidents Xi Jinping and Donald Trump at their dinner during the G20 meeting in Buenos Aires last Saturday always looked a flimsy affair. For all it being long on self-congratulation — “a great success”, both sides declared — it was short on substance.

Moreover, the detail that has subsequently emerged, overwhelmingly through the media of Trump’s tweets and television appearances by members of his administration, does not appear to align with what the Chinese side thought it had agreed to — although it is difficult to divine what that was as it has been mostly silent on the matter.

In making his opening negotiating bids in public, however, Trump has wrong-footed (again) Beijing, which anyway prefers to hold such discussions well away from the discomfort of public view.

There does not even seem to be agreement on the start point of the 90-day tariff suspension to allow trade talks to proceed that both sides do acknowledge was agreed. Trump says the clock started ticking at the end of the dinner; China has made no public comment.

As we noted earlier, the threat of more tariffs hangs over the talks; “I am a tariff man”, says Trump. And there are, of course, potential auto tariffs coming down the pike, with the results of a Commerce Department ‘Section 232’ investigation into whether foreign car imports threaten US national security expected within a couple weeks.

However, a potentially more damaging long-term threat to China’s economy lies in a different sanction the United States is contemplating — technology export controls.

Late last month, the administration posted in the Federal Gazette a call for public comments on emerging and foundation technologies that the United States could ban its firms selling to China on national security grounds.

Some of the technology categories listed have a direct bearing on two core pillars of the ‘Made in China 2025’ industrial policy, artificial intelligence and autonomous vehicles. In the latter, Chinese manufacturers are dependent on US-bought chips and sensors, currently imported but intended increasingly to be sourced from foreign companies acquired by Chinese companies through mergers and takeovers.

This route, too, is being blocked. Hence the revived drive towards indigenous production. The public comment period is for a relatively short three weeks that run to December 19, suggesting the Trump administration is champing at the bit to implement export controls.

Update: The tone of the 90-day talks is not likely to be improved by the arrest in Canada at the United States’ request of Meng Wanzhou, Huawei’s chief financial officer and a daughter of the telecoms company’s founder. Washington has started extradition proceedings in connection with possible violations of sanctions against Iran and North Korea. In contrast, to its public pronouncements on the trade talks, Beijing has been quick and firm in its condemnation.

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Xi And Trump Provide Temporary Relief

Chinese President Xi Jinping (R) meets with his U.S. counterpart Donald Trump in Buenos Aires, Argentina, Dec. 1, 2018.

CHINA HAS BOUGHT itself some time in its trade dispute with the United States, paying in farm goods, energy products and other industrial imports.

After a two and a half hour meeting over a steak dinner at the G20 summit in Buenos Aires, President Xi Jinping and US President Donald Trump called a time-out in the two countries’ tariff war. The United States agreed to suspend for 90 days the hike in tariffs to 25% from 10% on $200 billion of Chinese imports due to take effect on January 1 and not to introduce any new ones in return for purchases of unspecified but ‘substantial’ value of the above-mentioned goods.

Beijing and Washington will also step up talks on addressing broader structural issues the Trump administration has with China’s economy and body politic, although on those, Foreign Minister Wang Yi was somewhat ambiguous when he said these would cover ‘legitimate’ US concerns, leaving open a vast definitional loophole of what would count under that term.

It also looks as if Beijing has agreed to reverse its regulatory blocking of a proposed $44 billion takeover bid by Qualcomm, the US semiconductor manufacturer that is the world’s largest, for the Netherlands’ NXP Semiconductors that torpedoed the deal. However, Qualcomm has since said the proposed merger is dead.

Perhaps the most impactful part of the deal will be China’s agreement to designate Fentanyl as a controlled substance. The Chinese-made pain-killer is behind much of the opioid crisis in the United States, and one that disproportionately affectsTrump supporters.

In hailing the agreement as ‘incredible’, regardless of the fact that China had given up little if anything, Trump highlighted the positive impact it would have on US farmers, pointing up the most acute political pain point he is feeling at home from his tariffs.

But in truth, he is providing only temporary relief.

Ninety days is not much time to make any progress even on talks about talks on the intellectual property and market access issues. And all the time the threat of a re-escalation of the tensions will hang over discussions.

There might be some opportunity to revive (and rebrand) the agreement Xi struck with President Barack Obama that China would refrain from commercial cyber-espionage, which has, to all intents and purposes, collapsed. However, China will not abandon its ‘Made in China 2025’ industrial policy and will need to acquire foreign technology in support, by whatever means.

In short, the Buenos Aires agreement resolves none of the underlying issues of the economic let alone geopolitical rivalry between the two countries.

We are still in a position in which Trump is addicted to tariffs and Xi has no clear idea on how to treat him.

Update: Trump has tweeted that China has agreed to cut its 40% tariff on US car imports, which were anyway due to be reduced before the tit-for-tat tariffs started. Neither side had mentioned this in public while in Buenos Aires and China has yet to comment on the tweet.

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Washington Piles It On

IT IS BAD cop and bad cop, as far as the United States goes in the trade dispute with China.

Following US Vice President Mike Pence’s statements that not only would the United States not back down but might even double its tariffs on Chinese exports if Beijing did not mend its ways on alleged intellectual property theft and discriminatory technology licensing restrictions, US Trade Representative Robert Lighthizer has updated his department’s ‘Section 301’ findings to say that China continues to fail to alter its practices.

It was the original findings issued in March that triggered the initial US tariffs on $50 billion worth of Chinese goods, now expanded to $250 billion-worth.

It was also Lighthizer, before he joined the Trump administration, who had suggested that a case be brought against China under the World Trade Organisation’s Article 23, which would have much the same effect as throwing China out of the WTO as Kevin Hassett, chairman of the White House Council of Economic Advisers, has recently suggested should happen.

Is there a good cop waiting in the wings in the form of US President Donald Trump?

Expectations are rising in some quarters that a meeting between him President Xi Jinping at the G20 summit in Buenos Aires later this month will produce a ‘trade truce’.

Both sides could use a de-escalation of current tensions, but, equally, neither will back down on their fundamental positions.

At best Beijing will be prepared to make no more than cosmetic concessions that Trump can brandish domestically as evidence that his tough line has worked, even if real change is limited.

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US Democrats’ Midterms Success Will Not Change US-China Relations

OUR MAN IN Washington writes that the success of the US Democratic party in retaking control of the lower house of Congress in this week’s US midterm elections will not make much difference to the bipartisan consensus in Washington in favour of being tougher on China, certainly in the short-term and probably not for the duration of the Trump presidency.

In the unlikely event that Beijing was expecting American voters to deliver a stinging rebuff to their president at the polls, it will have been disappointed.

The new Congress, which does not convene until January, will let the Democrats play the spoiler in the House, where they now have a slim majority, but not advance their agenda. In the Senate, Trump’s Republicans increased their majority, and thus strengthened President Donald Trump’s nominating power, should he need, for example, to put in place a new Defense or Treasury Secretary who is more of a ‘China hawk’ than the incumbents.

The Democrats will not come to office unified in their position over trade, over which Congress, not the White House technically has ultimate authority as it writes the laws regarding trade deals and tariffs, and authorises the President’s remit over individual trade negotiations..

The Democrats old House leadership (in terms of both incumbency and age), which is likely if not certain, to continue in the new Congress, still reflects the interests of labour unions and has traditionally been sceptical of free trade. Some of new, younger, progressive Democrats have expressed pro-free trade sentiments. Elizabeth Warren, a possible if unlikely Democrat presidential nominee for 2020 and a veteran leader of the Democratic left, has complained that Trump’s punitive tariffs on China do not go far enough.

Two key figures to watch are Massachusetts Rep. Richard Neal, who is likely to become chair of the Ways and Means Committee, which gives him influence over budget allocations, and New Jersey Rep. Bill Pascrell, who is expected to chair the House trade subcommittee.

Neal is on record as a supporter of robust and enforceable labour and environmental provisions in trade deals, a position followed by many Democratic legislators, while Pascrell has opposed a putative free trade deal with the Philippines on the basis of the Duterte administration’s human rights record.

Pascrell has also hounded the Trump administration over its steel and aluminium tariffs and made rhetorical points about how Congress is trying to lower trade barriers in contrast to an administration that seeks to raise them. However, scoring political points by demanding the administration clarifies its tariff strategy and insisting it does not harm U.S. exporters or importers, is not the same thing as trying to force Trump’s hand over China trade in a direction it does not want to turn.

One area where there might be some momentum, because there is also support for it among House Republicans, is to rein in the president’s ability to unilaterally raise tariffs without consulting Congress, an attempt to wrest back some of Congress’s authority over trade that it has traditionally wielded.

In the current Congress, bills to that effect have failed to make it out of committee. However, were they to do better in the new Congress, they still face being killed off in the Senate, where there is a supportive Trump majority that Senate Majority Leader Mitch McConnell has signalled would be used to that end.

The Senate will likely be less fertile ground for those hoping to lower the tensions between Washington and Beijing. Many Democrats there, including Senate Minority Leader Chuck Schumer of New York, have spoken in support of the administration’s protectionist policies. Senators in Rust Belt states, where Trumpism has taken particular root, also look favourably on tariffs that could shield their local industries. Senator Sherrod Brown of Ohio, who leads the protectionist wing of the Democratic Party, recorded one of the most emphatic Democratic victories of last Tuesday.

There are issues other than trade between the two countries, of course, notably North Korea, the South China Sea and Taiwan, as well as the general one of Trump’s ‘America First’ stance at home and abroad, with China now categorised a strategic adversary of the United States.

The Congressional gridlock that he will face in the final two years of his first term may tempt him to become more active in foreign affairs in the run-up to the 2020 presidential elections. If there is one thing that is certain about the Trump administration is its unpredictability.

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